Forex Correlations: Re-alignment?

Tuesday, February 17th, 2009 at
7:17 PM

Earlier on this week, I posted a video that talked about trading Gold against the Dollar. The ability to do trades like these is based on on understanding the correlation between Currency Pairs and, in this case, a commodity.

The nature of these correlations in the Marketplace is usually taken for granted for certain periods, with good reason. Understanding correlations can help increase your profits in Forex Trading. For instance, when there are economic issues and investing in Stocks and Assets becomes dicey, a condition that is prevalent now, one can see why Gold would emerge as a champion. It’s just safe, you know?

The thing is, rising Gold prices go hand-in-hand with a weaker Dollar and vice versa, in some way because Gold is priced in Dollars. Here’s an interesting article on BabyPips.com that talks about some of the correlations between the Dollar and others.

Since the middle of January, this correlation is reversing. I mean that BOTH Gold and the Dollar are going higher at the same time. Investors, afraid of everything else, seem to believe that their money is still safe with the US Government. This is reasonable, as it would seem that they have done more to fight this recession than anyone else right now. Europe seems to be heading for an Explosion. It was highlighted today that Western European banks (countries like Sweden, Italy, Belgium…the rich folks basically) could be exposed to considerable risk if the poorer Eastern European cousins are unable to handle their debt. If failures start to occur, the Euro will be massacred. I expect the Europeans to do something drastic to try to prevent this, along with the crisis in confidence it would cost.

In any case, investors don’t want any part of that right now. So we have Gold and the Dollar on the march at the same time. You’ll have to forgive me for being unwilling to bet on how long this friendship will last, this time.